Web3.0 Token Economics: Nearly $800 million in assets has evaporated, what enlightenment does it bring us?
Since the rise of Web3.0, I wonder if you have heard of the encryption term tokenomics?
Tokenomics refers to the creation, management and interaction of tokens with their holders and their respective ecosystems, i.e. the study of how people interact with tokens.
Tokenomics is complex and interdisciplinary, combining elements from economics, finance, and many other fields. Beyond that, there are significant differences between different token mechanisms based on the unique characteristics of each ecosystem.
Typically, the tokenomics model in Web3.0 includes the following ⬇️
①Token issuance: the total supply of tokens and their creation mechanism (eg, mining, staking, or circulation).
②token use case: the purpose of the token (such as payment, voting, identity verification).
③token distribution: the distribution of tokens among participants (such as the founding team, early investors and the community).
④Token incentives: the way to use tokens to motivate required behaviors (such as pledge, voting).
Risks related to tokenomics model design are generally outside the scope of security audits. Therefore, once these risks appear, unexpected economic losses will be caused, just like the “dust to dust, dust to dust” incidents that we have observed in the platform overnight—all caused by design flaws or insufficient risk management .
According to statistics, the cumulative losses of these incidents amounted to billions of dollars.
$790 million in losses due to Tokenomics-related causes
In 2022, CertiK investigated several large-scale Tokenomics-related incidents, including Terra, Celsius Network, Beanstalk, Fortress, Axie Infinity, Solend, and Babylon Finance, among others.
Together, these high-profile incidents cost more than $790 million in losses and affected billions more worth of assets. Due to the negative impact of these events, a large number of unknown projects have suffered asset losses or even bankruptcy to varying degrees.
first level title
Model Structural Risk
The risks associated with model structure stem from the design of the project.
Arguably, the tokenomics model is one of the most important aspects of any blockchain project.
Insufficient preparation for the risks associated with the model structure can lead to significant harm, jeopardizing the long-term development of the project. The table below outlines a few examples of projects that "disappeared" due to risks related to the model structure.
Terra
Cause of event:Terra Ecosystemimage description
UST relies on carry traders to maintain its relationship with the dollar
Terra, the issuer of the stablecoin UST, collapsed in May 2022 as its token design eventually led to a downward price spiral. The value of the UST stablecoin is pegged to the US dollar, and it relies on Terra Station (Terra's official wallet and operation panel) to mint and destroy LUNA to adjust the value of UST. So we can see that it relies too much on arbitrageurs to maintain the stablecoin UST pegged to the US dollar.
When UST was de-pegged from the U.S. dollar, the price dropped sharply (at this time, arbitrageurs were powerless), which caused a huge panic in the market instantly, causing the project originally worth 60 billion U.S. dollars to lose almost all of its value within a few days.
Ultimately, the prices of LUNA and UST fell by more than 99%. However, risk analysis and stress testing related to decoupling risks and the behavior of stakeholders such as arbitrageurs may help avert this otherwise inevitable event.
Celsius Network
image description
Celsius users are offered up to 17% APY yield
Celsius Network is a decentralized lending platform that allows users to earn returns through their token assets.
In June 2022, Celsius Network filed for bankruptcy, negatively affecting more than 600,000 accounts (with a total value of $4.2 billion in assets held).
The collapse of Terra was also a "pusher" of the platform's bankruptcy to a certain extent, but another root cause is actually the unreasonable staking rewards provided by Celsius.
Under extreme market conditions, the project was unable to maintain the ultra-high returns it guaranteed to users, highlighting the importance of proper risk management for the long-term success of the project.
Beanstalk and the Fortress Protocol
image description
Beanstalk Transfer User Balance Proposal
Beanstalk is a credit-based decentralized stablecoin protocol that issues its native stablecoin on credit rather than collateral.
Attackers used flash loans to amplify their governance capabilities, ultimately stealing $182 million from the protocol through a malicious proposal.
Another decentralized lending and stablecoin platform called Fortress suffered an attack of a similar nature. By manipulating the price of their governance token, the attackers managed to get a malicious proposal through and steal approximately $3 million from the Fortress protocol.
These two incidents amply demonstrate how loopholes in the governance model go unnoticed in the marketplace.
external environment risk
External factors beyond the control of the project team or the community are also likely to bring risks to the project.
Understanding potential risks and monitoring changes in the environment can provide projects with the necessary flexibility and mobility to effectively respond to unexpected events and take appropriate actions.
Babylon Finance is a typical project affected by such external factors.
Babylon Finance
Cause of the incident: Significant losses were caused by the Rari/FEI hack.
image description
Babylon founder talks about Rari hack's impact on his project
After the hack, user withdrawals caused the total value locked (TVL) of the project to drop by more than 75%.
Babylon Finance’s native token BABL has lost too much value to be used as collateral anymore, and its $10 million lending market on Rari’s Fuse pool no longer exists.
Projects like Babylon failed not because of internal problems, but because they relied too much on external platforms. By monitoring and analyzing external accounts and markets, the project team could have responded and judged such risks in a timely manner.
Participant Conduct Risk
Participant behavior risk refers to the behavior of key players in the team or the behavior of key components in the ecosystem that may have a negative impact on the demand and value of a digital currency or token.
By understanding how different scenarios affect the behavior of different components of a project, teams can better prepare for potential challenges and reduce the risk of negative behavior.
These losses could have been reduced if better management of users and composition in the ecosystem could have been done.
Solend
Cause of the incident: Lack of monitoring and management of token issuance in low-liquidity isolation pools.
Solend is a lending project that leverages the scalability of the Solana platform to provide innovative financial solutions.
On November 2, 2022, at the time of the Solend incident, an attacker manipulated the price of the stablecoin USDH on a specific liquidity pool mainly used for the USDH price feed: the attacker inflated the price of USDH from $1 to $8.
Therefore, the attacker can use USDH as collateral to borrow other tokens in multiple isolated pools.
The breach resulted in a loss of approximately 41,000 SOL ($1.26 million).
write at the end
write at the end
A number of significant tokenomics-related events in 2022 have highlighted the need to optimize market risk management.
Security audits are undoubtedly crucial, but these incidents have also sounded the alarm for people—the importance of tokenomics analysis is self-evident, especially in today's rapidly growing and developing digital currency market, risk management is equally important.
On the Web 3.0 road, tokenomics will clearly continue to play a significant role in shaping the direction of the industry.
Therefore, the community must continue to participate and work together to build the correct tokenomics and build a better future for the industry.
Please continue to pay attention to the official CertiK official account, we will discuss tokenomics analysis and share with you how responsible risk management can help build a safer and more stable environment for Web3.0 and all users.
